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Dynamic Capital Structure Adjustment and the Impact of Fractional Dependent Variables

Published online by Cambridge University Press:  23 December 2015

Ralf Elsas
Affiliation:
elsas@bwl.lmu.de, Ludwig Maximilian University of Munich, Faculty of Business Administration (Munich School of Management), Munich 80539, Germany.
David Florysiak
Affiliation:
florysiak@bwl.lmu.de, Ludwig Maximilian University of Munich, Faculty of Business Administration (Munich School of Management), Munich 80539, Germany.
Corresponding

Abstract

Researchers in empirical corporate finance often use bounded ratios (e.g., debt ratios) as dependent variables in their regressions. Using the example of estimating the speed of adjustment toward target leverage, we show by Monte Carlo and resampling experiments that commonly applied estimators yield severely biased estimates, as they ignore that debt ratios are fractional (i.e., bounded between 0 and 1). We propose a new unbiased estimator for adjustment speed in the presence of fractional dependent variables that also controls for unobserved heterogeneity and unbalanced panel data. This new estimator is suitable for corporate finance applications beyond capital structure research.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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